Long Shot: Getting SaaSy

Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

A name from the Roth Conference that caught my interest is Software-as-a-Service (SaaS) ecommerce provider ARI Network Services (ARIS). Beware up front that the market cap is small at $22 million with limited volume, so this may be a name you can only play in small size in your personal account. Nonetheless, with rapidly growing revenue, profitability and an attractive acquisition that expands their dominance of a market niche, ARIS is poised for solid growth in the quarters ahead.

Milwaukee-based ARI runs websites, catalogs and lead-generation products for a number of "power" categories, including power sports, automotive wheels and tires, outdoor power equipment, marine and appliances. The company was founded in 1981, has 280 employees, and has grown to service 140 original equipment manufacturers, 195 distributors, and more than 22,000 dealers. Similar competitors in their business include Snap-on (SNA), Automatic Data Processing (ADP), and privately held Dominion Enterprises. The revenue model is very attractive because 88% is recurring subscription fees, with the balance in recurring transaction-type fees. Very little comes from one-off sales. ARIS is currently on a $27 million per year revenue run rate after recently reporting second-quarter results.

ARIS derives revenue from three main sources.

Electronic Catalogs: ARIS manages a proprietary database for power sports manufacturers going back 50 years. ARIS sells 12-month catalog subscriptions to dealers and distributors who interact with this catalog content through a software application to support their own sales and service. This business is shifting from CD-based to online, which will lower the cost and enable international expansion. This segment is about a third of sales and is stable with 5% annual growth.

Websites: On behalf of dealers, ARIS maintains more than 5,500 ecommerce websites. Revenues are generated from setup fees and transaction fees from customer's online sales to end consumers. This segment is 55% of revenue, growing around 20% per year.

Lead Generation: ARIS sells lead generation and management products designed to help dealers generate sales of PG&A through efficient marketing of their products. This segment is 12% of revenues and is growing around 18% annually.

The catalyst for ARIS is the $5 million acquisition last fall of bankrupt competitor 50 Below, which offered similar services in the same vertical markets with 3700 websites, generating around $9 million per year in revenue. The 50 Below deal is what expands ARIS beyond power sports into automotive wheels and tires, since 50 Below had industry-leading market share and grew from nothing to over 2000 websites in just a couple years. Post-acquisition ARIS now manages more than 5500 websites with leading market share in every target vertical. By acquiring 50 Below, ARIS also reduces churn due to customers lost to 50 Below. Finally, ARIS can recast 50 Below's margin model because it will no longer have to pay catalog fees to third parties, but simply tap ARI's broad catalog.

As always, there are plenty of risks to any exciting growth story. ARIS includes the usual risks associated with microcaps, including low trading volume, high price volatility and the like. Never place a market order, only limit orders. In addition, there are meaningful integration risks associated with 50 Below. Any time you take on a bankrupt competitor, even if the deal is a purchase of assets, you could inherit hidden legal liabilities. There are 130 employees to work into the ARIS culture, and competitors will make a full court press to steal customers. Beyond 50 Below, I'd also like to see a cleaner balance sheet, since ARIS carries around $7 million of debt as of the last earnings report. A recent private placement that raised $4.8 million does shore up its cash position, however.